Jerry Citarella: Why are annuities so often the problem?

Financial Truth

This week’s column is going to be written with tons of restraint. If I could type it in all capitals, for effect, I would, but that’s not realistic. I admit I’m not the financial police, but I have made a commitment to inform and protect, so, here I go.

After many years in the financial services industry, I’ve never been as frustrated as in the last three to five years. Like never before, I see people getting sold a specific financial product at what I believe to be an alarming rate.

I meet a lot of people who are concerned that they were misled into buying products. Some of my own clients have been presented with something that they’re told “will fix” all of their concerns. It may be too good to be true.

What’s interesting is that the No. 1 group attempting to take my clients from me is accountants and tax preparers.

About a decade ago, certain laws changed, permitting accountants to earn compensation for selling financial products. The commonality to all of these stories is what’s being recommended in almost every instance: an annuity.

For many years, I’ve had a problem with the aggressive sale of annuities in specific instances. The reason I need restraint is that annuities are viable financial products that make sense in many circumstances, but for some reason, they’ve become the product of choice for many salespeople.

Annuities are also used by many people who present themselves as financial advisers, but use this product for almost — if not exclusively — every client.

I will state this here: There’s not one financial product, investment or service that’s the answer for everyone’s problems, even if someone is working primarily with a specific age group or financial level.

Annuities have been around for many years. They were originally designed to provide a guaranteed income for a specified period of time, including a lifetime. Eventually, they also became deferred savings vehicles in fixed accounts.

They’ve changed and advanced over the years, and now annuity products can provide investments in fixed, variable or equity indexed or linked accounts.

Annuities are issued primarily by insurance companies and are very often sold by people with only insurance licenses or basic investment-based licenses.

I’m only scratching the surface with my discussion of annuities and how they work, but for now, that’s enough. Knowing all about them now is not the priority. Understanding they may be inappropriate for many people who own them is critical.

I know in most industries there are things that may not be completely appropriate. The problem with the issue I’m discussing is the extent to which it can impact someone’s future.

When dealing with someone’s finances, his or her future and the protection of his or her family, advisers have a responsibility to explore a wide range or a combination of products that can appropriately fulfill a person’s true needs. They should never find one product and try to sell it to everyone they meet.

Again, I must stress that annuities by themselves are not bad. Like all products, they have their place. But what I must also stress is that I’ve been involved in a number of situations in which people had no idea what product they owned.

I’ve also seen a number of situations in which people didn’t even know they owned a specific product. Many times, people have no idea how their products work or they are under the impression that it’s substantially better than it actually is. What product is it that comes up in conversation nearly every time? Annuities.

The biggest confusion I hear concerns the guarantees these products can offer and how much they cost. I find people are very rarely told how often the guarantees they’re paying for are actually ever used. Is it really worth the cost? I’ve actually heard advisers say, “You can’t tell people everything about those things; you’d never be able to sell one.”

I must stop now, but I hope you get the point. Feel free to explore annuities as an option for your planning, but be cautious of what you’re getting or being offered. This is a true “buyer beware” situation. Please talk to someone you trust before you buy.

Jerry Citarella is the owner of Infinity Wealth Management, www.InfinityGoals.com. 23734 Valencia Blvd., Suite 301, Valencia, 661-255-9555, ext. 11. He is also the author of The Truth Helps Series of financial planning books. Citarella’s column reflects his own views and not necessarily those of The Signal. Submit questions to: jcitarella@nextfinancial.com. Securities and investment advisory services offered through NEXT Financial Group Inc. Member FINRA/SIPC. Infinity Wealth Management is not an affiliate of NEXT Financial Group Inc.